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Hitting your direct marketing budget 84% of the time

Much virtual ink has been spilt discussing why the housing market, then the US economy, crumbled like a Barbie chair under a sumo wrestler in 2008. (My favorite account is Michael Lewis’s The Big Short; the book is excellent and now I’m looking forward to the movie)

In the end, through all the discussions of things like collateralized debt obligations, mortgage-based securities, and tranches, you could describe the problem as:

People assumed that stuff that would naturally all go wrong at oncewouldn’t go wrong all at once.

In this case, it was home mortgages. Mortgages were looked at as individual special unique snowflakes, when in reality, the things that would make for one person to default on their mortgage (bad economy, failures of certain types of sectors or jobs, taking on too much debt, unregulated and unjustified lending) would make for a bunch of people defaulting on their loans.

Yes, there are things that can affect individual communications that are not replicable. But there are a number of scenarios that can be systemic, whether it is the failure of the economy, a messaging issue, or that viral video of your executive director riding a stolen police horse naked down a major highway.

(That is, the executive director is naked, not the horse, although that last part could really go either way or both.)

Traditionally, direct marketing budgeting and budgeting in general is not like this. You set the budget for what you believe you can achieve based on previous years’ results and all of the things we’ve discussed this week. You assume that the good and the bad will balance each other out – that your good tests will pay for your bad ones and that yours learning throughout the year will help expand things a bit beyond your budget.

But when you assume that the success of a communication doesn’t correlate with the next communication or the last one, you make the same mistake as those people who wrecked the economy.

Thus I would recommend setting a high, medium, and low scenario for each communication in your direct marketing plan. Medium is what you believe is most likely based on your experience. High and low are one standard deviation away from your plan; you budget for the low scenario.

It need not necessarily be one standard deviation – you can change based on your and your organization’s risk tolerance – but one standard deviation ensures that there’s at least an 84% chance that each communication will be at or better than budget. If you have total correlation among your various communications (a worst case scenario), that means that you will only be under budget one out of every six years.

Ideally speaking, your budgeted scenario should have at least file replenishment level acquisition and reacquisition – that is, you should plan to end the year with as many or more donors than you started it with.

By budgeting for your “low” scenario budget, you’ve made your finance department happy (or at least less unhappy). And you have the opportunity to trim out your investment as the year goes on, which I’ll discuss tomorrow.